THE threat of a real exchange rate problem appears to be rising, and the question, as always, is what to do about it. It’s a hoary old question because South Africa has been in this spot many times before, and the simple answer is that not much can be done in any direct way. But is this too defeatist an attitude?
South Africa has for years relied on "hot money" inflows to balance its current account deficit. In the emerging market crisis in the late 1990s, the rand was hit precisely because these inflows dried up and reversed.
Although this current account "Achilles heel" has been the salient feature of the rand’s comparative value, details about the nature of the current account have changed. One of the most important changes has been the trade balance, which forms part of the current account balance. The trade balance was in deficit all of last year and has been growing. In the first 11 months of last year, it ballooned to R108bn, from R21bn for the whole of 2011.
Trade and Industry Minister Rob Davies came close to hitting the right note in Davos this week, saying he was more concerned about the rand’s volatility than its absolute value. The rand has dropped 37% against the euro and 35% against the dollar in the past 18 months. Yet, as it has been strong over that period, it probably now reflects something like fair value.
The problem is the volatility and the reasons for it.
It is broadly true that a weaker rand might be able to help manufacturing exporters, which Mr Davies noted with approval. But this decline is different in at least one major respect: it is not happening against the backdrop of a major international trend.
Ultimately, three things are behind South Africa’s current account problems. First, volatile labour relations on the mines have depressed mineral exports. Second, the aggressive effort by the Department of Mineral Resources to improve mine safety has often meant closing mines, which has had the same result. And third, a generally toxic relationship between business and the government, which is tending on the margins to depress investment.
South Africa has learnt by now that it can, at critical moments, lean against the trend of currency markets for a time, but they are generally best left alone. The underlying causes, however, can and must be addressed.